SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No. 0-23629
Happy Kids Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-3473638
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 West 33rd Street, Suite 1100, New York, New York 10001
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(Address of Principal Executive Offices) (Zip Code)
(212) 695-1151
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(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 30, 1999:
Class Number of Shares
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Common Stock, $.01 par value 10,375,693
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HAPPY KIDS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION..................... 1
Item 1. Condensed Consolidated Financial Statements..................... 1
Condensed Consolidated Balance Sheets as of March 31,1999
(unaudited) and December 31, 1998............................. 2
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 (unaudited)............. 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 (unaudited).............. 4
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 11
Results of Operations........................................... 12
Liquidity and Capital Resources................................. 13
Backlog......................................................... 14
Variability of Results; Seasonality; Cyclicality................ 14
Management Information Systems.................................. 15
European Monetary Union......................................... 16
Effect of Recently Issued Accounting Standards.................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 16
PART II. OTHER INFORMATION............................................... 17
Item 2. Changes in Securities and Use of Proceeds....................... 17
Item 5. Other Information............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 19
SIGNATURES................................................................. 20
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PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
----------------------------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, December 31,
1999 1998
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ASSETS (unaudited)
CURRENT ASSETS
Cash .............................................. $ 490 $ 139
Due from factor ................................... 30,963 20,640
Accounts receivable - trade, net .................. 595 347
Inventories ....................................... 16,852 23,579
Prepaid royalties ................................. 1,121 762
Deferred income taxes ............................. 1,029 1,029
Other current assets .............................. 2,531 1,496
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Total current assets ....................... 53,581 47,992
FIXED ASSETS - NET .................................... 1,801 1,459
OTHER ASSETS .......................................... 1,081 1,001
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Total assets ............................... $56,463 $50,452
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Due to bank ....................................... $ 6,695 $ 3,753
Accounts payable and accrued liabilities .......... 8,486 7,944
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Total current liabilities .................. 15,181 11,697
DEFERRED RENT PAYABLE ................................. 439 505
DUE TO STOCKHOLDERS ................................... 5,719 5,719
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - 5,000 shares authorized, $.01 par
value; no shares issued and outstanding ....... -- --
Common stock - 30,000 shares authorized, $.01 par
value; 10,280 shares issued and outstanding
at March 31, 1999 and December 31, 1998 ....... 103 103
Additional paid-in capital ........................ 23,263 23,263
Retained earnings ................................. 11,758 9,165
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Total stockholders' equity ................. 35,124 32,531
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Total liabilities and stockholders' equity.. $56,463 $50,452
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The accompanying notes are an integral part of these statements.
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HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
For the Three Months
Ended March 31,
---------------------------
1999 1998
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Net sales ................................... $ 45,872 $ 35,715
Cost of goods sold .......................... 34,092 27,084
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Gross profit ............................ 11,780 8,631
Operating expenses ................ 6,955 5,069
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Operating earnings ................ 4,825 3,562
Interest expense, net ....................... 354 990
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Income before income taxes ............. 4,471 2,572
Income taxes ................................ 1,878 260
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Net income ........................ $ 2,593 $ 2,312
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Basic income
per common share ........................ $ 0.25 $ 0.30
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Weighted average common
shares outstanding - basic .............. 10,280 7,750
========== ==========
Diluted income
per common share ........................ $ 0.25 $ 0.30
========== ==========
Weighted average common
shares outstanding - diluted ............ 10,310 7,750
========== ==========
Pro forma data (unaudited) :
Historical income before
provision for income taxes ........ $ 4,471 $ 2,572
Income taxes ............................ 1,878 1,080
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Net income ........................ $ 2,593 $ 1,492
========== ==========
Pro forma basic net income per share ........ $ 0.25 $ 0.19
========== ==========
Pro forma weighted average
common shares outstanding - basic ....... 10,280 7,750
========== ==========
Pro forma diluted net income per share ...... $ 0.25 $ 0.19
========== ==========
Pro forma weighted average
common shares outstanding - diluted ..... 10,310 7,750
========== ==========
The accompanying notes are an integral part of these statements.
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HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months
Ended March 31
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1999 1998
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Cash flows from operating activities:
Net income ..................................... $ 2,593 $ 2,312
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............... 110 57
Changes in operating assets and liabilities:
Accounts receivable ......................... (248) 25
Due from factor ............................. (10,323) (2,002)
Inventories ................................. 6,727 2,357
Prepaid royalties ........................... (359) (553)
Other current assets ........................ (1,035) 403
Other assets ................................ (80) (29)
Accounts payable and accrued expenses ....... 476 (4,427)
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Net cash used in operating activities .......... (2,139) (1,857)
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Cash flows from investing activities:
Acquisition of fixed assets ................. (452) (4)
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Cash flows from financing activities:
Net borrowings under line of credit ......... 2,942 2,318
Payments on capital lease ................... -- (18)
Dividends paid .............................. -- (366)
Payments on initial public offering costs ... -- (224)
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Net cash provided by financing activities ...... 2,942 1,710
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Net increase (decrease) in cash ................ 351 (151)
Cash at beginning of year ...................... 139 374
-------- --------
Cash at end of period .......................... $ 490 $ 223
======== ========
The accompanying notes are an integral part of these statements.
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HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- Basis of Presentation:
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The information presented as of March 31, 1999 and for the three-month
periods ended March 31, 1999 and March 31, 1998 is unaudited, but, in the
opinion of the Happy Kids Inc.'s (the "Company") management, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for the fair presentation of the Company's financial position as of
March 31, 1999 and the results of its operations and its cash flows for the
three-month periods ended March 31, 1999 and 1998. The financial statements
included herein have been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1998, which were included as part of
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission (the "SEC") on March 30, 1999.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
The Company was incorporated in 1988 in New York under the name O'Boy
Inc. and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities, with the first of such entities
commencing operations in 1979, all under the common ownership of the Company's
then-current shareholders. Immediately prior to the effectiveness of the
Company's initial public offering (the "Initial Public Offering"), as described
in Note 2, all of such separate entities became wholly-owned subsidiaries of the
Company (the "Reorganization"). The Company issued 4,262,500 additional shares
of common stock, to its then-current shareholders, in exchange for their
ownership in these separate business entities. All share and per share amounts
throughout this Form 10-Q have been restated to retroactively reflect the
Reorganization.
The accompanying condensed consolidated financial statements include the
consolidated accounts of the Company and its wholly owned subsidiaries to
reflect the Reorganization as stated above. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 -- Initial Public Offering:
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On April 2, 1998, the Company consummated its Initial Public Offering of
2,200,000 shares of its Common Stock at a price of $10.00 per share, all of
which shares were issued and sold by the Company. On April 23, 1998, the Company
consummated the exercise of the underwriters' over-allotment option granted by
the Company to the underwriters in connection with the Initial Public Offering.
As a result, the Company issued and sold an additional 330,000 shares of the
Company's Common Stock at the Initial Public Offering price of $10.00 per share.
The net proceeds to the Company from such sales were approximately $22.3
million.
Of the total net proceeds received by the Company upon the consummation
of its Initial Public Offering and the exercise of the over-allotment option,
$2.0 million was distributed to certain shareholders of the Company in
connection with the payment of a portion of the S Corporation distribution made
by the Company in connection with the Reorganization (the "S Corporation
Distribution") and the remaining amount was utilized to pay down a portion of
the outstanding balance under the Company's bank credit facility (the "Line of
Credit"). See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Note 3 -- Income Taxes:
- -----------------------
Prior to the completion of the Initial Public Offering, the Company had
elected to be treated as an S Corporation for Federal income tax reporting
purposes. An S Corporation is generally treated like a partnership and is exempt
from Federal income taxes, with certain exceptions, and shareholders report
their pro rata share of corporate taxable income or loss on their individual tax
returns. A provision for state income taxes was made for those states not
recognizing the Company's S Corporation status. The Company's S Corporation
status terminated on the day prior to the effectiveness of the Company's Initial
Public Offering described in Note 2.
Subsequent to the termination of the Company's S Corporation status, the
Company used the liability method for both Federal and state income tax
purposes. The effect of such change was reflected in net income for the second
quarter of 1998 when such termination occurred and resulted in an increase in
deferred tax assets and net earnings of approximately $1,024.
The pro forma provision for income taxes represents the income tax
provision that would have been reported had the Company been subject to Federal
and additional state and local income taxes as a C Corporation for all periods
presented.
Deferred income taxes are determined based on the difference between the
tax basis of an asset or liability and its reported amount in the financial
statements using enacted tax rates for the year in which the differences are
expected to reverse.
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HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The principal types of differences between assets and liabilities for
financial statement and tax return purposes giving rise to deferred income taxes
are accrued expenses, accumulated depreciation, certain costs capitalized to
inventory and allowance for doubtful accounts. A deferred tax asset has been
recorded for these differences.
Note 4 -- Due to Shareholders:
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In connection with the termination of the Company's S Corporation
status, the Company agreed to distribute an aggregate of $7.6 million to the
Company's pre-Initial Public Offering shareholders, such amounts representing
the Company's total undistributed equity resulting from the S Corporation or
limited liability corporation ("LLC") status of the Company and its related
entities prior to the Reorganization, of which $2.0 million was paid from the
proceeds of the Initial Public Offering. The balance is due pursuant to
four-year 5.7% notes payable to such shareholders. Such notes provide for the
timely distribution of amounts necessary to pay the remaining personal income
taxes of such shareholders or members due on amounts earned by such S
Corporations or LLCs for the period January 1, 1998 through the termination of S
Corporation or LLC status of approximately $314,000. In addition, existing
amounts due to shareholders of $1.4 million are subject to the same terms as the
above promissory notes.
Note 5 -- Pro forma Information:
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a. PRO FORMA RESULTS OF INCOME AND PRO FORMA INCOME TAXES:
Pro Forma adjustments in the statement of income for the three month
period ended March 31, 1998 reflect provisions for income taxes based upon pro
forma pretax income as if the Company had been subject to Federal and additional
state and local income taxes.
As disclosed in Note 3, the Company has, in the past, elected for
certain of its affiliates to be taxed as S Corporations pursuant to the Internal
Revenue Code. In connection with the Company's Initial Public Offering, the
Company terminated such S elections and partnership status and became subject to
Federal and additional state and local income taxes. The pro forma provision for
income taxes represents the income tax provisions that would have been reported
had the Company been subject to Federal and additional state and local income
taxes. The effective pro forma tax rate of the Company differs from the Federal
rate of 34% primarily due to the effects of state and local income taxes.
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HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
b. PRO FORMA NET INCOME:
Pro forma net income represents the historical amounts after the pro
forma adjustments discussed above.
Note 6 -- Earnings Per Share:
- -----------------------------
A reconciliation between basic and diluted earnings per share from
operations is as follows:
Three Months Ended
-------------------------
March 31,
---------
1999 1998
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(In thousands except per
share amounts)
Net Income ................... $ 2,593 $ 2,312
Basic EPS:
Basic common shares ...... 10,280 7,750
========== ==========
Basic EPS ............... $ 0.25 $ 0.30
========== ==========
Diluted EPS:
Basic common shares ...... 10,280 7,750
Diluted common shares .... 30 --
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Total diluted shares ..... 10,310 7,750
========== ==========
Diluted EPS .............. $ 0.25 $ 0.30
========== ==========
Note 7 -- Accounts Receivable:
- ------------------------------
Accounts Receivable consist of the following:
March 31, December 31,
1999 1998
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(In thousands)
Accounts Receivable....... $ 1,908 $ 860
Allowances................ 1,313 513
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$ 595 $ 347
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HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 -- Inventories:
- ----------------------
Inventories consist of the following finished goods:
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
Warehouse............................... $ 12,779 $ 16,531
In-transit, overseas and Raw Materials.. 4,302 7,277
LIFO valuation allowance................ (229) (229)
--------- ----------
$ 16,852 $ 23,579
========= ==========
For the quarter ended March 31, 1998, the liquidation of LIFO
inventories decreased the cost of sales and, therefore, increased income before
taxes by $53,000. There was no liquidation of LIFO inventories in 1999.
Note 9 -- Subsequent Events:
- ----------------------------
On April 13, 1999, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with D. Glasgow & Sons Inc., a New York corporation
(the "Seller") and Mr. Andrew D. Glasgow, its sole shareholder, to acquire
certain of the assets (the "Assets") of the Seller. The Assets include
intellectual property rights under license agreements to design and manufacture
children's apparel bearing logos, trademarks and tradenames of the National
Football League, the National Basketball Association, Major League Baseball and
the National Hockey League, as well as certain Warner Brothers' properties,
including Looney Tunes, and Saban's Power Rangers, among other licenses. The
Company also acquired certain machinery and equipment from the Seller. The
purchase price for the Assets included a cash consideration of $3.7 million and
the issuance of 95,693 shares of Common Stock of the Company having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted stock. The Purchase Agreement also provides for the Company
to purchase the Seller's apparel inventory for an additional cash payment of
approximately $2.9 million.
In connection with the execution of the Purchase Agreement, Mr. Glasgow,
formerly the President of the Seller, was elected as a Director of the Company
in April 1999. In addition, Mr. Glasgow was appointed Vice President of the
Company and will serve as President of the Company's Glasgow Division. Mr.
Glasgow also executed a five (5) year Employment Agreement with the Company.
Under the terms of such Employment Agreement, Mr. Glasgow is entitled to an
annual base salary of $250,000 and bonuses commensurate with other executive
officers of the Company, which amounts and payments are within the discretion of
the Compensation Committee of the Board of Directors. In addition, Mr. Glasgow
is also entitled to
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HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
receive, in quarterly payments, subject to annual adjustment, a percentage of
certain divisional profits and certain import sales profits of the Company's
Glasgow Division. Mr. Glasgow's Employment Agreement requires Mr. Glasgow to
maintain the confidentiality of Company information and requires that during the
term of his employment with the Company and thereafter for a period of two
years, he will not compete with the Company in any state or territory of the
United States where the Company does business by engaging in any capacity in a
business which is competitive with the business of the Company. Mr. Glasgow's
Employment Agreement also provides that, for a period of two years following the
termination of his employment with the Company, he shall not solicit the
Company's licensors, customers or employees.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
General
- -------
Happy Kids Inc., a New York corporation ("Happy Kids" or the "Company"),
is a designer and marketer of custom-designed, licensed and branded children's
apparel. The Company produces high-quality, coordinated apparel programs,
including knit tops, bottoms, overalls, shortalls, coveralls and swimwear, for
newborns, infants, toddlers, boys and girls (collectively, "playwear"). The
Company's major licenses include Nickelodeon's Rugrats, AND 1 and B.U.M.
Equipment. The Company also designs and delivers private label branded playwear
programs for leading retailers, such as Sesame Street for Kmart. The Company's
strategy is to work closely with its customers to design and market coordinated
playwear programs resulting in gross margins that the Company believes are
higher than those typically generated from sales of non-licensed or non-private
label branded playwear.
Prior to and including much of 1995, the Company's operating strategy
primarily focused on developing and marketing its own house brands. The Company
manufactured products for inventory under the Company's brands and often
concentrated on enhancing sales volume rather than focusing on a combination of
sales volume and gross margins. The Company believes that the loss it incurred
in 1995 was primarily attributable to these factors. In 1995, to leverage its
strong customer relationships, the Company initiated its current sales strategy
under which the Company's customers order specific quantities of goods on a
fixed-price basis three to nine months in advance of a selling season. As a
result, substantially all of the Company's playwear is produced upon receipt of
customer orders. Also in 1995, the Company elected to concentrate on developing
a diversified portfolio of popular, established and well-recognized licensed
properties and private label relationships and de-emphasized its reliance on
house brands, which have been a declining component of the Company's net sales
in each year since 1995. Since that time, the Company's strategy has been to
work closely with its customers to design and market high-quality coordinated
apparel programs resulting in gross margins that the Company believes are higher
than those typically generated from sales of non-licensed or non-private label
branded playwear.
Statements contained or incorporated by reference in this Form 10-Q that
are not based on historical facts are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including, without limitation, statements regarding the Company's sales
strategy, concentration on the development of a diversified portfolio of
licensed properties and private label relationships and gross margins.
Forward-looking statements also may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "estimate", "anticipate",
"continue", or similar terms, variations of such terms or the negative of those
terms. This Form 10-Q contains forward-looking statements that involve risks and
uncertainties, including, but not limited to, those related to: (i) general
economic conditions; (ii) a dependence on license arrangements; (iii) a
dependence on private label relationships; (iv) a dependence on contract
manufacturers; (v) a reliance on key customers; (vi) a dependence on access to
credit facilities; (vii) the risks associated with significant growth; (viii)
competition; (ix) seasonality of sales; (x) cyclicality and trends in the
apparel industry; (xi) import restrictions and
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other risks associated with international business; (xii) the Company's ability
to successfully integrate the licenses recently acquired from D. Glasgow & Sons,
Inc. into its current operations; and (xiii) risks relating to the Company's
Year 2000 compliance and the Year 2000 compliance of the Company's contract
manufacturers, suppliers, distributors, marketing partners and certain other
parties. The Company's actual results may differ materially from the results
discussed in the forward-looking statements contained herein.
Results of Operations
- ---------------------
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Net Sales. Net sales increased $10.2 million, or 28.4%, to $45.9 million
in the first quarter of 1999 from $35.7 million in the first quarter of 1998.
The increase in net sales is attributable primarily to increased sales of
playwear of both licensed products and private label programs.
Gross Profit. Gross profit increased by $3.2 million, or 36.5%, to $11.8
million in the first quarter of 1999 from $8.6 million in the first quarter of
1998. Such increase was due, in part, to increased sales in certain higher
margin licensed products as well as efficiencies in transportation and handling
costs.
Operating Expenses. Operating expenses increased by $1.9 million, or
37.2%, to $7.0 million in the first quarter of 1999 from $5.1 million in the
first quarter of 1998. Operating expenses consist entirely of selling, design
and shipping expenses, and general and administrative expenses.
Selling, Design and Shipping Expenses. Selling, design and
shipping expenses increased by $1.3 million, or 45.5%, to $4.3
million in the first quarter of 1999 from $3.0 million in the
first quarter of 1998. This increase is attributable primarily to
higher sales compensation, advertising and shipping and freight
costs associated with increased sales volumes. In addition,
design and production salaries and sampling costs increased as a
result of the Company's expanded product lines. As a percentage
of net sales, selling, design and shipping expenses increased to
9.4% in the first quarter of 1999 from 8.3% in the first quarter
of 1998.
General and Administrative Expenses. General and
administrative expenses increased $537,000, or 25.5%, to $2.6
million in the first quarter of 1999 from $2.1 million in the
first quarter of 1998. This increase is primarily the result of
higher payroll and related payroll costs including payroll taxes
and benefits, factor commissions associated with increased sales
volume, as well as higher professional and data processing
expenses. As a percentage of net sales, general and
administrative expenses decreased to 5.8% in the first quarter of
1999 from 5.9% in the first quarter of 1998 due to the operating
leverage associated with the higher sales.
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Interest Expense, net. Interest expense, net decreased $636,000, or
64.2%, to $354,000 in the first quarter of 1999 from $990,000 in the first
quarter of 1998. This decrease is a result of the application of a substantial
portion of the proceeds from the Company's initial public offering (the "IPO")
to the repayment of the Company's bank debt in the second quarter of 1998. As a
percentage of net sales, interest expense decreased to 0.8% for the first
quarter of 1999 compared to 2.8% in the first quarter of 1998.
Income Before Income Taxes. Income before income taxes increased $1.9
million, or 73.8%, to $4.5 million in the first quarter of 1999 from $2.6
million in the first quarter of 1998 due to the reasons described above. As a
percentage of net sales, income before income taxes increased to 9.7% in the
first quarter of 1999 from 7.2% in the first quarter of 1998.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its cash requirements primarily through
operations and borrowings under its bank line of credit. Historically, the
Company's borrowing requirements have been seasonal, with peak working capital
needs arising during the first and third quarters.
On April 2, 1998, the Company consummated its IPO of 2,200,000 shares of
its common stock, $0.01 par value (the "Common Stock"), at a price of $10.00 per
share, all of which shares were issued and sold by the Company. On April 23,
1998, the Company consummated the exercise of the underwriters' over-allotment
option granted by the Company to the underwriters in connection with the IPO. As
a result, the Company issued and sold an additional 330,000 shares of the
Company's Common Stock at the IPO price of $10.00 per share. The net proceeds to
the Company from such sales were approximately $22.3 million.
Of the total net proceeds received by the Company upon the consummation
of its IPO and the exercise of the over-allotment option, $2.0 million was
distributed to certain shareholders of the Company in connection with the
payment of a portion of the S Corporation distribution and the remaining amount
was utilized to pay down a portion of the outstanding balance under the
Company's credit line.
On March 31, 1999, the Company executed an amendment of its existing
credit line whereby the Company's credit line was amended to provide for a
discretionary one year revolving line of credit, to expire on March 31, 2000,
renewable annually, providing for advances and letter of credit accommodations
up to the lesser of (a) $50.0 million from April 1, 1999 to March 31, 2000, or
(b) at all times the sum of (i) up to eighty-five percent of eligible accounts
receivables, plus (ii) up to fifty percent of finished goods inventory, plus
(iii) overadvances approved by the lender. The maximum amount of revolving
credit advances outstanding at any time cannot exceed $40.0 million and the
maximum amount of letters of credit outstanding at any time may not exceed $35.0
million. The interest rate on amounts borrowed will be the bank's then
prevailing prime rate (7.75% at March 31, 1999) less 0.5% or at LIBOR plus 2.0%,
at the option of the Company. The credit line is collateralized by substantially
all of the assets of the Company. As of March 31, 1999, the Company had $6.7
million of outstanding direct borrowings and $12.6 million of contingent
liabilities under open letters of credit.
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<PAGE>
In addition, the Company's lender has sole discretion to make or
withhold advances under the credit line. There can be no assurance that the
lender will continue to lend under the credit line. If the lender exercises its
discretion to withhold advances, there would be a material adverse effect on the
Company's business, financial condition and results of operations.
As of March 31, 1999, the Company's other principal sources of liquidity
included cash of $490,000, amounts due from factor of $31.0 million and net
accounts receivable of $595,000. The Company had working capital of $38.4
million and long-term debt of $6.2 million as of March 31, 1999.
For the quarter ended March 31, 1999, operating activities used cash of
$2.1 million primarily as a result of an increase in amounts due from factor of
$10.3 million, an increase in other current assets of $1.0 million, offset in
part by net income of $2.6 million and an increase in inventory of $6.7 million.
Net cash used in financing activities during the same period was $2.9 million
consisting of payments under the Company's credit line.
Historically, the Company's business has not required significant
capital expenditures. The Company's capital expenditures for the first quarter
of 1999 and 1998, were $452,000 and $4,000, respectively. The Company expects to
incur capital expenditures in 1999 totaling $1.0 million for the purchase of new
computers, software and telecommunications equipment. The Company believes that
cash flow expected to be generated from operations, together with borrowings
under its existing credit line, as amended, will be adequate to satisfy current
and planned operations for at least the next twelve (12) months.
Backlog
- -------
The Company's customers order specific quantities of goods on a
fixed-price basis three to nine months in advance of a selling season. Such
customer orders are placed in backlog upon their receipt and acceptance by the
Company. Customer orders are generally cancelable on notice to the Company
without penalty. Although the Company has not had significant cancellations in
the past, no assurance can be given that it will not experience a significant
level of cancellations in the future or that its backlog at any point in time
will be converted to sales. Many of the Company's orders are received
significantly in advance of scheduled delivery periods. Consequently, the
Company had backlog of $106.7 million at March 31, 1999, all of which it expects
to ship over the next three to nine months. However, in recent months the
Company has experienced a significant increase in orders involving a rapid
turnaround from the date the order is placed to the shipment date.
Variability of Results; Seasonality; Cyclicality
- ------------------------------------------------
Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so. Generally, the Company has
experienced significantly higher net sales in the first and third quarters as
compared to the second and fourth quarters, although this may change from time
to time. The seasonality of the Company's business also affects borrowings under
the Company's
- 14 -
<PAGE>
lines of credit and its level of backlog, which fluctuate in response to demand
for the Company's products. Therefore, the results of any interim period are not
necessarily indicative of the results that may be achieved for an entire year.
In addition, the apparel industry is a cyclical industry heavily dependent upon
the overall level of consumer spending, with purchases of apparel and related
goods tending to decline during recessionary periods when disposable income is
low. A difficult retail environment could result in downward price pressure
which could adversely impact the Company's gross profit margins.
Management Information Systems
- ------------------------------
GENERAL
The Company believes that advanced information processing is essential
to maintaining its competitive position. The Company participates in the
electronic data interchange program maintained by many of its larger customers,
including JC Penney, Kids R Us, Sears, Target and WalMart. This program allows
the Company to receive customer orders, provide advanced shipping notices,
monitor store inventory and track orders on-line from the time such orders are
placed through delivery.
YEAR 2000 COMPLIANCE
In 1998, the Company established an oversight committee to review all of
the Company's computer systems and programs, as well as the computer systems of
the third parties upon whose data or functionality the Company relies in any
material respect, and to assess their ability to process transactions in the
Year 2000 and beyond. The Company, through such oversight committee, currently
is upgrading its management information systems, which it expects to complete
during the second quarter of 1999, to ensure proper processing of transactions
relating to Year 2000 and beyond. The Company continues to evaluate appropriate
courses of corrective actions, including replacement of certain systems.
Although the Company does not expect the costs associated with ensuring Year
2000 compliance to have a material affect on its financial position or results
of operations, if the computer systems used by the Company, or any of its
suppliers or vendors fail or experience significant difficulties related to the
Year 2000, the Company could experience delays in manufacturing, delays in
shipping, an inability to monitor customer orders or to manage inventory, or may
experience related risks that could materially adversely affect the Company's
financial position or its results of operations. The Company has identified and
been in contact with its major customers, its bank and its factor. The reply
from each such entity indicates that each is, or will be, Year 2000 compliant.
The Company has incurred approximately $50,000 of expenses for Year 2000
remediation costs in 1999 and estimates future additional expenditures for Year
2000 remediation of approximately $100,000. All costs associated with Year 2000
compliance are being funded with cash flow generated from operations and are
being expensed as incurred. The Company has not developed a contingency plan
with respect to Year 2000 issues should they arise.
- 15 -
<PAGE>
European Monetary Union
- -----------------------
On January 1, 1999, eleven of the fifteen member countries of the
European Union set fixed conversion rates between their existing legacy
currencies and the euro. As such, these participating countries have agreed to
adopt the euro as their common legal currency. The eleven participating
countries will issue sovereign debt exclusively in euro and will redenominate
outstanding sovereign debt. The legacy currencies will continue to be used as
legal tender through January 1, 2002, at which point the legacy currencies will
be canceled and euro bills and coins will be used for cash transactions in the
participating countries.
The Company does not denominate its agreements or transactions with
foreign entities in foreign currencies. The Company currently does not believe
that the euro conversion will have a material impact on the Company's financial
condition or results of operations.
Effect of Recently Issued Accounting Standards
- ----------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities," which is effective for the Company's fiscal year ending
December 31, 2000. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Adoption of SFAS No. 133 is not
expected to have a material effect on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Exposure
- ----------------------
The Company is subject to market risk from exposure to changes in
interest rates relating primarily to the Company's short-term debt obligations.
The Company primarily enters into such short-term debt obligations to support
general corporate purposes, including capital expenditures and working capital
needs. All of the Company's debt is short-term with variable rates. To manage
its exposure to changes in interest rates, the Company's policy is to manage
such interest rate exposure through the use of short-term borrowings, which are
negotiated with their lenders on an annual basis. The Company does not expect
changes in interest rates to have a material adverse effect on income or cash
flows in fiscal 1999, although there can be no assurance that interest rates
will not significantly change.
- 16 -
<PAGE>
Part II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Changes in Securities
---------------------
On April 13, 1999, the Company issued 95,693 shares of restricted Common
Stock having a fair market value of $1.0 million to Andrew D. Glasgow. See "Item
5. Other Information."
In addition, in January 1999, the Company granted stock options to
purchase an aggregate of 100,000 shares of its Common Stock with an exercise
price of $14.85 per share to a certain Director and executive officer of the
Company and 25,000 shares of its Common Stock with an exercise price of $13.50
per share to a certain executive officer of the Company. Such options were
granted at exercise prices of 110% and 100%, respectively, of the grant date
fair market value of the Company's Common Stock. All of such options were issued
pursuant to the Company's 1997 Stock Plan. The shares of Common Stock underlying
such options have not yet been registered under the securities laws.
The Company did not employ an underwriter in connection with the
issuance or sale of the securities described above. The Company claims that the
issuance or sale of the foregoing securities was exempt from registration under
either (i) Section 4(2) of the Securities Act of 1933, as amended (the "Act"),
as transactions not involving any public offering and such securities having
been acquired for investment and not with a view to distribution, or (ii) Rule
701 under the Act as transactions made pursuant to a written compensatory
benefit plan or pursuant to a written contract relating to compensation.
Appropriate legends were affixed to the stock certificate issued in connection
with the Glasgow transaction. All recipients had adequate access to information
about the Company.
ITEM 5. OTHER INFORMATION.
Asset Purchase
--------------
On April 13, 1999, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with D. Glasgow & Sons Inc., a New York corporation
(the "Seller") and Mr. Andrew D. Glasgow, its sole shareholder, to acquire
certain of the assets (the "Assets") of the Seller. The Assets include
intellectual property rights under license agreements to design and manufacture
children's apparel bearing logos, trademarks and tradenames of the National
Football League, the National Basketball Association, Major League Baseball and
the National Hockey League, as well as certain Warner Brothers' properties,
including Looney Tunes, and Saban's Power Rangers, among other licenses. The
Company also acquired certain machinery and equipment from the Seller. The
purchase price for the Assets included a cash consideration of $3.7 million and
the issuance of 95,693 shares of Common Stock of the Company having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted stock. The Purchase Agreement also provides for the Company
to purchase the Seller's apparel inventory for an additional cash payment of
approximately $2.9 million.
- 17 -
<PAGE>
Management Change and Addition to the Board of Directors
--------------------------------------------------------
In connection with the execution of the Purchase Agreement, Mr. Glasgow,
formerly the President of the Seller, was elected as a Director of the Company
in April 1999. In addition, Mr. Glasgow was appointed Vice President of the
Company and will serve as President of the Company's Glasgow Division. Mr.
Glasgow also executed a five (5) year Employment Agreement with the Company.
Under the terms of such Employment Agreement, Mr. Glasgow is entitled to an
annual base salary of $250,000 and bonuses commensurate with other executive
officers of the Company, which amounts and payments are within the discretion of
the Compensation Committee of the Board of Directors. In addition, Mr. Glasgow
is also entitled to receive, in quarterly payments, subject to annual
adjustment, a percentage of certain divisional profits and certain import sales
profits of the Company's Glasgow Division. Mr. Glasgow's Employment Agreement
requires Mr. Glasgow to maintain the confidentiality of Company information and
requires that during the term of his employment with the Company and thereafter
for a period of two years, he will not compete with the Company in any state or
territory of the United States where the Company does business by engaging in
any capacity in a business which is competitive with the business of the
Company. Mr. Glasgow's Employment Agreement also provides that, for a period of
two years following the termination of his employment with the Company, he shall
not solicit the Company's licensors, customers or employees.
- 18 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.1 Asset Purchase Agreement, dated as of April 13, 1999, by
and among the Company, D. Glasgow & Sons, Inc. and Andrew
Glasgow. (Incorporated herein by reference to the
Company's Current Report on Form 8-K filed on April 27,
1999.)
10.1 Amendment No. 6, dated as of March 31, 1999, to the
Company's Financing Agreement with CIT Group/Commercial
Services, Inc., as agent for itself and certain other
lenders, as previously amended.
10.2 Employment Agreement, dated as of April 13, 1999, by and
between the Company and Andrew Glasgow. (Incorporated
herein by reference to the Company's Current Report on
Form 8-K filed on April 27, 1999.)
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On April 27, 1999, the Company filed a Current Report on Form 8-K
in connection with the acquisition by the Company of certain of
the assets of D. Glasgow & Sons, Inc.
- 19 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Happy Kids Inc.
DATE: May 17, 1999 By: /s/ Jack M. Benun
---------------------------------
Jack M. Benun
President and Chief Executive Officer
(Principal Executive Officer)
DATE: May 17, 1999 By: /s/ Stuart Bender
---------------------------------
Stuart Bender
Chief Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT 10.1
AMENDMENT NO. 6 TO THE COMPANY'S FINANCING AGREEMENT
<PAGE>
SIXTH AMENDMENT
TO THE FINANCING AGREEMENT
SIXTH AMENDMENT, dated as of March 31, 1999 (this "Amendment"), to
the Financing Agreement, dated as of February 13, 1996, as amended by the First
Amendment dated as of February 13, 1997, the Second Amendment dated as of June
1, 1997, the Third Amendment dated as of October 1, 1997, the Fourth Amendment
dated as of November 28, 1997 and the Fifth Amendment dated as of March 25, 1998
(as so amended, the "Financing Agreement"), by and among Happy Kids Children's
Apparel Ltd., a New York corporation formerly known as Happy Kids, Ltd. ("Happy
Kids"), Happy Kids, Inc., a New York corporation formerly known as O'Boy Inc.
(the "Parent"), Talk of the Town Apparel Corp., a New York corporation ("TOT
Apparel"), O.P. Kids, Inc., a New Jersey corporation and successor by merger to
O.P. Kids, L.L.C. ("OP Inc.", and together with Happy Kids, the Parent and TOT
Apparel, each a "Borrower" and collectively, the "Borrowers"), the guarantors
listed on Schedule B to the Financing Agreement (each a "Guarantor" and
collectively, the "Guarantors"), the lenders listed on Schedule A to the
Financing Agreement (each a "Lender" and collectively the "Lenders") and The CIT
Group/Commercial Services, Inc., as agent for the Lenders (in such capacity, the
"Agent").
WHEREAS, the Borrowers, the Guarantors, the Lenders and the Agent
wish to amend the Financing Agreement to among other things (i) increase the
Credit Exposure (as defined in the Financing Agreement) and the Total Credit
Exposure (as defined in the Financing Agreement), (ii) extend the Termination
Anniversary Date (as defined in the Financing Agreement), (iii) change the
interest rate and provide for a Eurodollar interest rate option, and (iv) amend
certain other terms and conditions in the Financing Agreement. Accordingly, the
Borrowers, the Guarantors, the Lenders and the Agent hereby agree as follows:
1. DEFINITIONS. All terms which are defined in the Financing
Agreement and not otherwise defined herein are used herein as defined therein.
2. RECITALS. The first sentence in the Recitals is hereby amended in
its entirety to read as follows: "The Borrowers and the Guarantors have asked
the Lenders to extend credit to the Borrowers, from the date hereof through the
Final Maturity Date (as hereinafter defined), in the form of discretionary
revolving credit loans to the Borrowers at any time and from time to time prior
to the Final Maturity Date in an aggregate principal amount not in excess of
$50,000,000."
3. EXISTING DEFINITIONS. (a) The definition of the term "Business
Day" in Section 1.01 of the Financing Agreement is hereby amended in its
entirety to read as follows:
"'Business Day' means any day other than a Saturday,
Sunday or other day on which commercial banks in New York City are
required or authorized to close, provided, that with respect to
borrowing, payment, conversion to or continuation of, or
determination of interest rate on, Eurodollar Loans,
<PAGE>
Business Day shall mean any Business Day on which dealings in United
States dollars may be carried on in the interbank eurodollar markets
in New York City and London."
(b) The definition of the term "Credit Exposure" in Section
1.01 of the Financing Agreement is hereby amended in its entirety to read as
follows:
"'Credit Exposure' means, with respect to each Lender,
the total credit exposure of such Lender as set forth on Schedule A
hereto, as the same may be adjusted from time to time pursuant to
Sections 10.01 or 11.01 hereof."
(c) The definition of the term "L/C Issuer" in Section 1.01 of
the Financing Agreement is hereby amended in its entirety to read as follows:
"'L/C Issuer' means The Chase Manhattan Bank or its
successors."
(d) The definition of the term "Post-Default Rate" in Section
1.01 of the Financing Agreement is hereby amended in its entirety to read as
follows:
"'Post-Default Rate' means a rate of interest per annum
equal to the rate of interest otherwise in effect plus 1-1/2% or, if
no other rate of interest is in effect, the Prime Rate plus 1%."
(e) The definition of the term "Termination Anniversary Date"
in Section 1.01 of the Financing Agreement is hereby amended in its entirety to
read as follows:
"'Termination Anniversary Date' means March 31, 2000 and
thereafter March 31 of each succeeding calendar year."
(f) The definition of the term "Total Credit Exposure" in
Section 1.01 of the Financing Agreement is hereby amended in its entirety to
read as follows:
"'Total Credit Exposure' means the sum of the Lenders'
Credit Exposures in Schedule A hereto, as the same may be adjusted
from time to time pursuant to Sections 10.01 or 11.01 hereof."
4. NEW DEFINITIONS. The following definitions of the terms
"Eurodollar Base Rate", "Eurodollar Loan", "Eurodollar Rate", "Interest Period",
"Prime Rate Loan", and "Reserve Requirements" are hereby added to Section 1.01
of the Financing Agreement:
"'Eurodollar Base Rate' means, with respect to each day
during each Interest Period pertaining to a Eurodollar Loan, the
rate of interest published in The Wall Street Journal, Eastern
Edition, two Business Days prior to such Interest Period as the
"London Interbank Offered Rate" applicable to one, two, three or six
months, as selected by the Administrative Borrower. In the event
that The Wall Street Journal, Eastern Edition is not published or
such rate does not appear in The Wall Street Journal, Eastern
Edition, the Eurodollar Base Rate shall
- 2 -
<PAGE>
be the rate determined by the Agent to be the rate at which deposits
in United States dollars are offered by The Chase Manhattan Bank to
first class banks in the interbank eurodollar market where the
eurodollar and foreign currency and exchange operations in respect
of its eurodollar loans are then being conducted at approximately
11:00 A.M., New York City time, two Business Days prior to the
beginning of such Interest Period, in an amount approximately equal
to the principal amount of the Eurodollar Loan to which such
Interest Period is to apply and for a period of time comparable to
such Interest Period."
"'Eurodollar Loan' means a Loan bearing interest based
on the Eurodollar Rate."
"'Eurodollar Rate' means with respect to each day during
each Interest Period pertaining to a Eurodollar Loan, a rate per
annum determined for such day in accordance with the following
formula (rounded upward to the nearest 1/16 of 1%):
Eurodollar Base Rate
----------------------------
1.00 - Reserve Requirements"
"'Interest Period' means with respect to any Eurodollar
Loan, the period commencing on the borrowing date or the date of any
continuation of or conversion into such Eurodollar Loan, as the case
may be, and ending one, two, three or six months thereafter, in each
case as selected by the Administrative Borrower in the applicable
notice given to the Agent pursuant to Sections 2.03 or 2.10 hereof;
provided that (i) each Interest Period shall begin on the first
Business Day of a month, (ii) any Interest Period that would
otherwise end on a day that is not a Business Day shall be extended
to the next succeeding Business Day, unless such Business Day falls
in another calendar month, in which case such Interest Period shall
end on the next preceding Business Day, (iii) no Interest Period for
any Eurodollar Loan shall end after the Final Maturity Date, and
(iv) no more than three (3) Interest Periods in the aggregate for
the Borrowers may exist at any one time."
"'Prime Rate Loan' means a Loan bearing interest at the
Prime Rate."
"'Reserve Requirements' means, for any day as applied to
a Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect
on such day (including, without limitation, basic, supplemental,
marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other Governmental
Authority having jurisdiction with respect thereto) dealing with
reserve requirements prescribed for eurocurrency funding (currently
referred to as "Eurocurrency Liabilities" in Regulation D of the
Board of Governors of the Federal Reserve System) maintained by a
member bank of the Federal Reserve
- 3 -
<PAGE>
System. Eurodollar Loans shall be deemed to constitute Eurocurrency
Liabilities and to be subject to such reserve requirements without
benefit of or credit for proration, exceptions or offsets which may
be available from time to time to any Lender or the Affiliate of any
Lender under Regulation D of the Board of Governors of the Federal
Reserve System."
5. CREDIT EXPOSURE. The second sentence of Section 2.01 of the
Financing Agreement is hereby amended in its entirety to read as follows:
"Notwithstanding the foregoing, the aggregate principal
amount of Loans outstanding at any time to the Borrowers shall not
exceed the lowest of (i) the difference between (A) the Total Credit
Exposure, and (B) the aggregate Letter of Credit Obligations, (ii)
the difference between (A) the then current Borrowing Base and (B)
the aggregate Letter of Credit Obligations, and (iii) $40,000,000."
6. MAKING THE LOANS. Section 2.03 of the Financing Agreement is
hereby amended in its entirety to read as follows:
"SECTION 2.03. Making the Loans. The Administrative
Borrower, on behalf of itself or any other Borrower, shall give the
Agent prior written or telephone notice (which notice, if requested
by the Agent, must be promptly confirmed in writing in substantially
the form of Exhibit I hereto (a "Notice of Borrowing")) (i) not
later than 12:00 noon (New York City time) on the date of the
proposed borrowing, in the case of a borrowing consisting of Prime
Rate Loans, or (ii) not later than 12:00 noon (New York City time)
three Business Days prior to such proposed borrowing in the case of
a borrowing consisting of Eurodollar Loans, provided that Eurodollar
Loans will only be made on the first Business Day of a month. Such
Notice of Borrowing shall be irrevocable and shall specify the
principal amount of the proposed borrowing (which, in the case of a
Eurodollar Loan, must be in a minimum amount of $1,500,000 and in
multiples of $500,000 in excess thereof), whether such Loan is
requested to be a Prime Rate Loan or a Eurodollar Loan and, in the
case of a Eurodollar Loan, the initial Interest Period for such
Eurodollar Loan and the proposed borrowing date, which must be a
Business Day and, in the case of a Eurodollar Loan, the first
Business Day of a month, and, if the Agent agrees in its sole and
absolute discretion to make such Loan to a Borrower, such Borrower
shall be bound to make a borrowing in accordance therewith. The
Agent may act without liability upon the basis of written, telecopy
or telephone notice believed by the Agent in good faith to be from
the Administrative Borrower (or from any officer thereof designated
in writing to the Agent), and the Borrowers hereby waive the right
to dispute the Agent's record of the terms of any such telephonic
Notice of Borrowing."
- 4 -
<PAGE>
7. FUNDING AND SETTLEMENT. (a) The second sentence of Section
2.05(a)(i) of the Financing Agreement is hereby amended in its entirety to read
as follows:
"If either (1) the Administrative Borrower gives a
Notice of Borrowing requesting a Eurodollar Loan and the Agent has
agreed to make such Loan or (2) the Administrative Borrower gives a
Notice of Borrowing requesting a Prime Rate Loan and the Agent
agrees to make such Loan and elects not to fund such Loan on behalf
of the Lenders, then promptly after receipt of the Notice of
Borrowing requesting such Loan, the Agent shall notify each Lender
of the specifics of the requested Loan and that it will not fund the
requested Loan on behalf of the Lenders. If the Agent notifies the
Lenders that it will not fund a requested Loan on behalf of the
Lenders, each Lender shall make its Pro Rata Share of the Loan
available to the Agent, in immediately available funds, at the
Payment Office no later than 3:00 p.m. (New York City time)
(provided that the Agent requests payment from such Lender not later
than 12:00 noon) on the date of the proposed Loan."
(b) The first sentence of Section 2.05(b)(i) of the Financing
Agreement is hereby amended in its entirety to read as follows:
"With respect to each Eurodollar Loan, on the first and
the last date of each Interest Period, and with respect to all
periods for which the Agent, on behalf of the Lenders, has funded
Prime Rate Loans pursuant to subsection 2.05(a), on the first
Business Day after the last day of each week, or such shorter period
as the Agent may from time to time select (any such week or shorter
period being herein called a "Settlement Period"), the Agent shall
notify each Lender of the average daily unpaid principal amount of
the Loans outstanding during such Settlement Period."
8. INTEREST. Paragraphs (a) and (c) of Section 2.06 of the Financing
Agreement are hereby amended in their entirety to read as follows:
"(a) Revolving Credit Loans. Each Loan which is a
Eurodollar Loan shall bear interest on the principal amount thereof
from time to time outstanding from the date of such Loan until such
principal amount becomes due, at a rate per annum equal to the
Eurodollar Rate for the Interest Period in effect for such Loan plus
2.00%. Each Loan which is a Prime Rate Loan shall bear interest on
the principal amount thereof from time to time outstanding from the
date of such Loan, until such principal amount becomes due, at a
rate per annum equal to the Prime Rate minus .50%."
"(c) Interest Payment. Interest on each Eurodollar Loan
shall be payable in arrears on the last day of each Interest Period
of such Eurodollar Loan and, in the case of any Eurodollar Loan of
six month duration, the day that interest would have been paid if
such Eurodollar Loan had an interest period of three months.
Interest on each Prime Rate Loan shall be payable monthly, in
arrears,
- 5 -
<PAGE>
on the first day of each month, commencing on the first day of the
month following the month in which such Loan is made, and at
maturity (whether upon demand, by acceleration or otherwise).
Interest at the Post-Default Rate shall be payable on demand. The
Borrowers hereby authorize the Agent to, and the Agent may, from
time to time, charge the Loan Account pursuant to Section 4.02
hereof with the amount of any interest payment due hereunder."
9. PREPAYMENTS. Paragraph (g) of Section 2.07 of the Financing
Agreement is hereby amended by adding the following at the end thereof:
"Notwithstanding the foregoing in this Section 2.07,
prepayments of Eurodollar Loans shall be subject to the following
additional requirements: (i) all prepayments of Eurodollar Loans
shall be subject to the terms of Section 2.09 of this Agreement,
(ii) prepayments of Eurodollar Loans shall be made upon at least
three (3) Business Days irrevocable notice to the Agent, and (iii)
no partial prepayment of a Eurodollar Loan shall be permitted."
10. EURODOLLAR PROVISIONS. The following new Sections 2.08, 2.09 and
2.10 are hereby added to the Financing Agreement:
"SECTION 2.08. Eurodollar Rate Not Determinable;
Illegality or Impropriety.
(a) In the event, and on each occasion, that on or
before the day on which the Eurodollar Rate is to be determined for
a borrowing that is to include Eurodollar Loans, the Agent has
determined in good faith that, or has been advised by the Required
Lenders that, (i) the Eurodollar Rate cannot be determined for any
reason, (ii) the Eurodollar Rate will not adequately and fairly
reflect the cost of maintaining Eurodollar Loans or (iii) United
States dollar deposits in the principal amount of the applicable
Eurodollar Loans are not available in the interbank eurodollar
market where the eurodollar and foreign currency and exchange
operations in respect of the Lenders' Eurodollar Loans are then
being conducted, the Agent shall, as soon as practicable thereafter,
give written notice of such determination to the Administrative
Borrower and the other Lenders. In the event of any such
determination, any request by the Administrative Borrower for a
Eurodollar Loan pursuant to Section 2.03 shall, until, in the case
of such a determination by the Required Lenders, the Agent has been
advised by the Required Lenders and the Agent has so advised the
Administrative Borrower that, or in the case of a determination by
the Agent, the Agent has advised the Administrative Borrower and the
other Lenders that, the circumstances giving rise to such notice no
longer exist, be deemed to be a request for a Prime Rate Loan. Each
determination by the Agent and/or the Required Lenders hereunder
shall be conclusive and binding absent manifest error.
- 6 -
<PAGE>
(b) In the event that it shall be unlawful or improper
for any Lender to make, maintain or fund any Eurodollar Loan as
contemplated by this Agreement, then such Lender shall forthwith
give notice thereof to the Agent and the Administrative Borrower
describing such illegality or impropriety in reasonable detail.
Effective immediately upon the giving of such notice, the obligation
of such Lender to make Eurodollar Loans shall be suspended for the
duration of such illegality or impropriety and, if and when such
illegality or impropriety ceases to exist, such suspension shall
cease, and such Lender shall notify the Agent and the Administrative
Borrower. If any such change shall make it unlawful or improper for
any Lender to maintain any outstanding Eurodollar Loan as a
Eurodollar Loan, such Lender shall, upon the happening of such
event, notify the Agent and the Administrative Borrower, and the
Administrative Borrower shall immediately, or if permitted by
applicable law, rule, regulation, order, decree, interpretation,
request or directive, at the end of the then current Interest Period
for such Eurodollar Loan, convert each such Eurodollar Loan into a
Prime Rate Loan.
SECTION 2.09. Indemnity.
(a) The Borrowers hereby jointly and severally indemnify
each Lender against any loss or expense that such Lender actually
sustains or incurs (including, without limitation, any loss or
expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such Lender to fund or maintain
any Eurodollar Loan, and including loss of anticipated profits) as a
consequence of (i) any failure by the Borrowers to fulfill on the
date of any borrowing hereunder the applicable conditions set forth
in Article V, (ii) any failure by the Borrowers to borrow any
Eurodollar Loan hereunder, to convert any Prime Rate Loan into a
Eurodollar Loan or to continue a Eurodollar Loan as such after
notice of such borrowing, conversion or continuation has been given
pursuant to Section 2.03 or Section 2.10 hereof, (iii) any payment,
prepayment (mandatory or optional) or conversion of a Eurodollar
Loan required by any provision of this Agreement or otherwise made
on a date other than the last day of the Interest Period applicable
thereto, (iv) any default in payment or prepayment of the principal
amount of any Eurodollar Loan or any part thereof or interest
accrued thereon, as and when due and payable (at the due date
thereof, by notice of prepayment or otherwise), or (v) the
occurrence of any Event of Default, including, in each such case,
any loss (including, without limitation, loss of anticipated
profits) or reasonable expense sustained or incurred in liquidating
or employing deposits from third parties acquired to effect or
maintain such Loan or any part thereof as a Eurodollar Loan. Such
loss or reasonable expense shall include but not be limited to an
amount equal to the excess, if any, as reasonably determined by such
Lender, of (i) its cost of obtaining the funds for the Loan being
paid or prepaid or converted or continued or not borrowed or
converted or continued (based on the Eurodollar Rate applicable
thereto) for the period from the date of such payment, prepayment,
conversion, continuation or failure to
- 7 -
<PAGE>
borrow, convert or continue on the last day of the Interest Period
for such Loan (or, in the case of a failure to borrow, convert or
continue, the last day of the Interest Period for such Loan that
would have commenced on the date of such failure to borrow, convert
or continue) over (ii) the amount of interest (as reasonably
determined by such Lender) that would be realized by such Lender in
re-employing the funds so paid, prepaid, converted or continued or
not borrowed, converted or continued for such Interest Period. A
certificate of any Lender setting forth in reasonable detail any
amount or amounts that such Lender is entitled to receive pursuant
to this Section 2.09 and the basis for the determination of such
amount or amounts shall be delivered to the Administrative Borrower
and shall be conclusive and binding absent manifest error.
(b) Notwithstanding paragraph (a) of this Section 2.09,
the Agent will use reasonable efforts to minimize or reduce any such
loss or expense resulting from the mandatory prepayments required by
Section 2.07 of this Agreement by (i) applying all payments and
prepayments to Loans bearing interest at the Prime Rate prior to any
application of payments to Loans bearing interest at the Eurodollar
Rate and (ii) after all Prime Rate Loans have been paid in full,
calculating any such loss or expense based upon the net decrease in
Eurodollar Loans on a day after giving effect to all prepayments and
all Loans made on such day.
SECTION 2.10. Continuation and Conversion of Loans.
(a) Subject to Section 2.08 hereof, the Borrowers shall
have the right, at any time, on three (3) Business Days' prior
irrevocable written or telecopy notice to the Agent, to continue any
Eurodollar Loan, or any portion thereof, into a subsequent Interest
Period or to convert any Prime Rate Loan or portion thereof into a
Eurodollar Loan, or on one (1) Business Day's prior irrevocable
written or telecopy notice to the Agent, to convert any Eurodollar
Loan or portion thereof into a Prime Rate Loan, subject to the
following:
(i) no Eurodollar Loan may be continued as such
and no Prime Rate Loan may be converted into a Eurodollar Loan, when
any Event of Default or Default shall have occurred and be
continuing at such time;
(ii) in the case of a continuation of a Eurodollar
Loan as such or a conversion of a Prime Rate Loan into a Eurodollar
Loan, the aggregate principal amount of such Eurodollar Loan shall
not be less than $1,500,000 and in multiples of $500,000 if in
excess thereof;
(iii) in the case of a conversion from a
Eurodollar Loan to a Prime Rate Loan accrued interest on the Loan
(or portion thereof) being converted shall be jointly and severally
paid by the Borrowers at the time of conversion;
- 8 -
<PAGE>
(iv) a Prime Rate Loan may be converted into a
Eurodollar Loan only on the first Business Day of a month;
(v) any portion of a Loan maturing or required to
be repaid in less than one month may not be converted into or
continued as a Eurodollar Loan; and
(vi) if any conversion of a Eurodollar Loan shall
be effected on a day other than the last day of an Interest Period,
the Borrowers shall jointly and severally reimburse each Lender on
demand for any loss incurred or to be incurred by it in the
reemployment of the funds released by such conversion as provided in
Section 2.09 hereof.
In the event that the Administrative Borrower shall not give notice
to continue any Eurodollar Loan into a subsequent Interest Period,
such Loan shall automatically become a Prime Rate Loan at the
expiration of the then current Interest Period."
11. FEES. Section 4.01 of the Financing Agreement is hereby amended
by deleting paragraph (c) thereof in its entirety and substituting in lieu
thereof the following new paragraph (c):
"(c) L/C ISSUER FEE. The Borrowers agree to pay to the
Agent for the account of the L/C Issuer a non-refundable L/C
Issuer's fee in the amount of $25,000 per annum, which L/C Issuer's
fee is earned in full by the L/C Issuer on March 31, 1999 and on the
31st day of each March thereafter and is payable in twelve
consecutive monthly installments of $2,083.33 on April 1, 1999 and
on the first day of each month thereafter."
12. FINANCIAL COVENANTS. Section 7.01(l) of the Financing Agreement
is hereby amended in its entirety to read as follows:
"(l) FINANCIAL COVENANTS.
(i) TANGIBLE NET WORTH. Maintained Consolidated
Tangible Net Worth (before any LIFO adjustments made for the prior
fiscal year in accordance with GAAP) of not less than $28,000,000 at
all times.
(ii) NET LOSS. Not incur a Cumulative Net Loss
(before any LIFO adjustments made for the prior fiscal year in
accordance with GAAP) for the Parent and its Subsidiaries at the end
of any fiscal quarter of the Parent."
- 9 -
<PAGE>
13. ROYALTY PAYMENTS. Clause (viii) of Section 7.02(b) of the
Financing Agreement is hereby amended in its entirety to read as follows:
"(viii) Indebtedness represented by minimum royalty
payments under any License Agreement entered into by any Borrower in
the ordinary course of business;"
14. OPERATING LEASES. Subclause B of Section 7.02(g) of the
Financing Agreement is hereby amended in its entirety to read as follows:
"(B) Operating Lease Obligations incurred in the
ordinary course of business of the Borrowers and the Corporate
Guarantors and their Subsidiaries."
15. CAPITAL EXPENDITURES. Section 7.02(h) of the Financing Agreement
is hereby amended by deleting the amount "$200,000" and substituting in lieu
thereof "$2,000,000 in any calendar year."
16. DELIVERY OF NOTES. Each Lender shall deliver to the Agent, for
delivery to and cancellation by the Borrowers, all Notes issued by the Borrowers
and held by the Lenders under the Financing Agreement (collectively, the "Old
Notes"). The Borrowers shall execute and deliver to the Agent for the account of
each Lender the Notes which such Lender is entitled to receive pursuant to
Section 2.04 of the Financing Agreement, in the form of Exhibit A thereto and in
the principal amount for each Lender equal to its Pro Rata Share of the Total
Credit Exposure, as set forth in Annex I to this Amendment (the "New Notes" and
together with this Amendment, the "Amendment Documents"). The Agent shall
release and deliver the Old Notes to the Borrowers for cancellation and deliver
the New Notes to the Lenders.
17. SCHEDULE A. Schedule A to the Financing Agreement is hereby
amended by deleting such Schedule in its entirety and substituting in lieu
thereof new Schedule A, which is attached hereto as Annex I.
18. CONDITIONS. This Amendment shall become effective only upon
satisfaction in full of the following conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the "Amendment
Effective Date"):
(a) Representations and Warranties; No Event of Default. The
representations and warranties contained herein, in Section 6.01 of the
Financing Agreement and in each other Loan Document and certificate or other
writing delivered to the Agent and the Lenders pursuant hereto on or prior to
the Amendment Effective Date shall be correct on and as of the Amendment
Effective Date as though made on and as of such date (except to the extent that
such representations and warranties expressly relate solely to an earlier date
in which case such representations and warranties shall be true and correct on
and as of such date); and no Potential Default or Event of Default shall have
occurred and be continuing on the Amendment Effective Date or would result from
this Amendment becoming effective in accordance with its terms.
- 10 -
<PAGE>
(b) Delivery of Documents. The Agent shall have received on or
before the Amendment Effective Date the following, each in form and substance
satisfactory to the Agent and, unless indicated otherwise, dated the Amendment
Effective Date:
(i) counterparts of this Amendment, duly executed by
the Borrowers, the Guarantors and the Lenders;
(ii) a copy of the resolutions of each Borrower and each
Corporate Guarantor, certified as of the Amendment Effective Date by an
authorized officer thereof, authorizing the execution of this Amendment
and the transactions contemplated hereby;
(iii) a certificate of an authorized officer of each
Borrower and each Corporate Guarantor, certifying the names and true
signatures of the representatives of such Person authorized to sign this
Amendment, together with evidence of the incumbency of such authorized
officers;
(iv) a certificate of the chief executive officer or the
chief financial officer of the Parent, certifying as to the matters set
forth in subsection (a) of this Section 18;
(v) the New Notes, duly executed by each of the
Borrowers; and
(vi) such other agreements, instruments, approvals,
opinions and other documents as the Agent may reasonably request.
(c) Proceedings. All proceedings in connection with the
transactions contemplated by the Amendment Documents, and all documents
incidental thereto, shall be satisfactory to the Agent and its special counsel,
and the Agent and such special counsel shall have received all such information
and such counterpart originals or certified copies of documents, and such other
agreements, instruments, approvals, opinions and other documents, as the Agent
or such special counsel may reasonably request.
(d) Fee. The Borrowers shall have paid the Agent for the
account of the Lenders in accordance with the Lenders' respective Pro Rata
Shares (or the Agent may charge the Loan Account pursuant to Section 4.02) a fee
of $37,000, which fee shall be earned in full on the date of this Amendment.
19. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers and the
Corporate Guarantors represents and warrants as follows:
(a) Each Borrower and Guarantor (i) is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its organization and (ii) has all requisite power, authority and legal right to
execute, deliver and perform the Amendment Documents and to perform the
Financing Agreement, as amended hereby.
- 11 -
<PAGE>
(b) The execution, delivery and performance by it of the
Amendment Documents and the performance by it of the Financing Agreement, as
amended hereby (i) have been duly authorized by all necessary action, (ii) do
not and will not violate or create a default under its articles of organization,
by-laws or any applicable law or any contractual restriction binding or
otherwise affecting it or any of its properties, and (iii) except as provided in
the Loan Documents, do not and will not result in or require the creation of any
Lien upon or with respect to its property.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with (i) the due execution, delivery and performance by
it of the Amendment Documents and (ii) the performance by it of the Amendment
Documents and the Financing Agreement, as amended hereby.
(d) Each of the Amendment Documents and the Financing
Agreement, as amended hereby, is a legal, valid and binding obligation of each
Borrower and Corporate Guarantor that is a party thereto enforceable against
each such Person in accordance with the terms thereof.
(e) The representations and warranties contained in Article VI
of the Financing Agreement are correct on and as of the Amendment Effective Date
as though made on and as of the Amendment Effective Date (except to the extent
such representations and warranties expressly relate to an earlier date in which
case such representations and warranties shall be true and correct as of such
earlier date), and no Event of Default or Potential Default has occurred and is
continuing on and as of the Amendment Effective Date or will result from this
Amendment becoming effective in accordance with its terms.
20. CONTINUED EFFECTIVENESS OF THE FINANCING AGREEMENT. Each of the
Borrowers and the Corporate Guarantors hereby confirms and agrees that (i) each
Loan Document to which it is a party is, and shall continue to be, in full force
and effect and is hereby ratified and confirmed in all respects except that on
and after the Amendment Effective Date all references in any such Loan Document
to "the Financing Agreement", "thereto", "thereof", "thereunder" or words of
like import referring to the Financing Agreement shall mean the Financing
Agreement as amended by this Amendment, and (ii) to the extent any such Loan
Document purports to assign or pledge to the Agent, or to grant to the Agent a
Lien on any collateral as security for the Obligations of the Borrowers or the
Guarantors from time to time existing in respect of the Financing Agreement and
the Loan Documents, such pledge, assignment and/or grant of the Lien is hereby
ratified and confirmed in all respects.
- 12 -
<PAGE>
21. MISCELLANEOUS. (a) This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
(d) The Borrowers will pay on demand all reasonable fees,
costs and expenses of the Agent in connection with the preparation, execution
and delivery of this Amendment, including, without limitation, the reasonable
fees, disbursements and other charges of Schulte Roth & Zabel LLP, counsel to
the Agent.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
- 13 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWERS:
----------
HAPPY KIDS CHILDREN'S APPAREL LTD.,
formerly known as Happy Kids, Ltd.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
HAPPY KIDS INC., formerly known as
O'Boy Inc.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
TALK OF THE TOWN APPAREL CORP.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
O.P. KIDS, INC.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
<PAGE>
GUARANTORS:
-----------
H.O.T. KIDZ, INC.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
HAWK INDUSTRIES, INC.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
J&B 18 CORP.
By: /s/ Stuart Bender
-----------------------------------
Title:
Name: Stuart Bender
<PAGE>
AGENT AND LENDER:
-----------------
THE CIT GROUP/COMMERCIAL
SERVICES, INC.
By: /s/ Deborah Rogut
-----------------------------------
Title: Vice President
Name: Deborah Rogut
LENDERS:
--------
THE CHASE MANHATTAN BANK
By: /s/ David F. Gibbs
-----------------------------------
Title: Vice President
Name: David F. Gibbs
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ Gary Harkins
-----------------------------------
Title: Vice President
Name: Gary Harkins
By: /s/ Lissa Baum
-----------------------------------
Title: Senior Vice President
Name: Lissa Baum
REPUBLIC NATIONAL BANK OF NEW YORK
By: /s/ Thomas DeGeorge
-----------------------------------
Title: Vice President
Name: Thomas DeGeorge
<PAGE>
Annex I
SCHEDULE A
----------
Lender Exposure Percentage
- ------ -------- ----------
The CIT Group/Commercial Services, Inc. $14,815,000 29.63%
The Chase Manhattan Bank $20,565,000 41.13%
Israel Discount Bank of New York $ 6,640,000 13.28%
Republic National Bank of New York $ 7,980,000 15.96%
------------ --------
$50,000,000 100.00%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDING
MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001052262
<NAME> Happy Kids Inc.
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 490
<SECURITIES> 0
<RECEIVABLES> 31,558
<ALLOWANCES> 1,313
<INVENTORY> 16,852
<CURRENT-ASSETS> 53,581
<PP&E> 1,801
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,463
<CURRENT-LIABILITIES> 15,181
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 35,021
<TOTAL-LIABILITY-AND-EQUITY> 56,463
<SALES> 45,872
<TOTAL-REVENUES> 45,872
<CGS> 34,092
<TOTAL-COSTS> 6,955
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> 4,471
<INCOME-TAX> 1,878
<INCOME-CONTINUING> 2,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,593
<EPS-PRIMARY> 0.25 <F1>
<EPS-DILUTED> 0.25 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
